Bug fix on Option Indicator calculation (#7999)

* Handle expired options * unit test * Move Zero Checks to Single Location --------- Co-authored-by: Alexandre Catarino <[email protected]>
QuantConnect · May 7, 2024 · bb7a7f2 · bb7a7f2
1 parent 520e604
commit bb7a7f2
Show file tree

Hide file tree

Showing 4 changed files with 28 additions and 13 deletions.
diff --git a/Indicators/ImpliedVolatility.cs b/Indicators/ImpliedVolatility.cs
@@ -309,17 +309,18 @@ protected override decimal ComputeNextValue(IndicatorDataPoint input)
         private decimal TheoreticalPrice(decimal volatility, decimal spotPrice, decimal strikePrice, decimal timeTillExpiry, decimal riskFreeRate, 
             decimal dividendYield, OptionRight optionType, OptionPricingModelType optionModel = OptionPricingModelType.BlackScholes)
         {
-            switch (optionModel)
+            if (timeTillExpiry <= 0m)
             {
-                // Binomial model also follows BSM process (log-normal)
-                case OptionPricingModelType.BinomialCoxRossRubinstein:
-                    return OptionGreekIndicatorsHelper.CRRTheoreticalPrice(volatility, spotPrice, strikePrice, timeTillExpiry, riskFreeRate, dividendYield, optionType);
-                case OptionPricingModelType.ForwardTree:
-                    return OptionGreekIndicatorsHelper.ForwardTreeTheoreticalPrice(volatility, spotPrice, strikePrice, timeTillExpiry, riskFreeRate, dividendYield, optionType);
-                case OptionPricingModelType.BlackScholes:
-                default:
-                    return OptionGreekIndicatorsHelper.BlackTheoreticalPrice(volatility, spotPrice, strikePrice, timeTillExpiry, riskFreeRate, dividendYield, optionType);
+                return 0m;
             }
+
+            return optionModel switch
+            {
+                // Binomial model also follows BSM process (log-normal)
+                OptionPricingModelType.BinomialCoxRossRubinstein => OptionGreekIndicatorsHelper.CRRTheoreticalPrice(volatility, spotPrice, strikePrice, timeTillExpiry, riskFreeRate, dividendYield, optionType),
+                OptionPricingModelType.ForwardTree => OptionGreekIndicatorsHelper.ForwardTreeTheoreticalPrice(volatility, spotPrice, strikePrice, timeTillExpiry, riskFreeRate, dividendYield, optionType),
+                _ => OptionGreekIndicatorsHelper.BlackTheoreticalPrice(volatility, spotPrice, strikePrice, timeTillExpiry, riskFreeRate, dividendYield, optionType),
+            };
         }
 
         /// <summary>

diff --git a/Indicators/OptionGreekIndicatorBase.cs b/Indicators/OptionGreekIndicatorBase.cs
@@ -174,8 +174,8 @@ protected override decimal ComputeNextValue(IndicatorDataPoint input)
                 RiskFreeRate.Update(time, _riskFreeInterestRateModel.GetInterestRate(time));
                 DividendYield.Update(time, _dividendYieldModel.GetDividendYield(time));
 
-                var timeTillExpiry = Convert.ToDecimal((Expiry - time).TotalDays) / 365m;
-                _greekValue = CalculateGreek(timeTillExpiry);
+                var timeTillExpiry = Convert.ToDecimal((Expiry - time).TotalDays / 365);
+                _greekValue = timeTillExpiry < 0 ? 0 : CalculateGreek(timeTillExpiry);
             }
 
             return _greekValue;

diff --git a/Indicators/OptionGreekIndicatorsHelper.cs b/Indicators/OptionGreekIndicatorsHelper.cs
@@ -58,7 +58,7 @@ public static decimal BlackTheoreticalPrice(decimal volatility, decimal spotPric
         internal static decimal CalculateD1(decimal spotPrice, decimal strikePrice, decimal timeToExpiration, decimal riskFreeRate, decimal dividendYield, decimal volatility)
         {
             var numerator = DecimalMath(Math.Log, spotPrice / strikePrice) + (riskFreeRate - dividendYield + 0.5m * volatility * volatility) * timeToExpiration;
-            var denominator = volatility * DecimalMath(Math.Sqrt, timeToExpiration);
+            var denominator = volatility * DecimalMath(Math.Sqrt, Math.Max(0m, timeToExpiration));
             if (denominator == 0m)
             {
                 // return a random variable large enough to produce normal probability density close to 1
@@ -69,7 +69,7 @@ internal static decimal CalculateD1(decimal spotPrice, decimal strikePrice, deci
 
         internal static decimal CalculateD2(decimal d1, decimal volatility, decimal timeToExpiration)
         {
-            return d1 - volatility * DecimalMath(Math.Sqrt, timeToExpiration);
+            return d1 - volatility * DecimalMath(Math.Sqrt, Math.Max(0m, timeToExpiration));
         }
 
         // Reference: https://en.wikipedia.org/wiki/Binomial_options_pricing_model#Step_1:_Create_the_binomial_price_tree

diff --git a/Tests/Indicators/OptionBaseIndicatorTests.cs b/Tests/Indicators/OptionBaseIndicatorTests.cs
@@ -106,6 +106,20 @@ protected void RunTestIndicator(Symbol call, Symbol put, OptionIndicatorBase cal
             Assert.AreEqual(expected, (double)putIndicator.Current.Value, acceptance);
         }
 
+        [Test]
+        public void ZeroGreeksIfExpired()
+        {
+            var indicator = CreateIndicator();
+            var date = new DateTime(2099, 1, 1);    // date that the option must be expired already
+            var price = 500m;
+            var optionPrice = 10m;
+
+            indicator.Update(new IndicatorDataPoint(_symbol, date, optionPrice));
+            indicator.Update(new IndicatorDataPoint(_underlying, date, price));
+
+            Assert.AreEqual(0m, indicator.Current.Value);
+        }
+
         [Test]
         public override void ResetsProperly()
         {